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As frictions with the rest of the world pile up, China is actively turning to development of its domestic economy to find growth potential. Thanks to structural optimization, the economy is expected to expand. In the second half of the year, new and old structural components that curbed consumption will be eliminated. Tax cuts are expected to guide corporate profits and stabilize investment. While the total amount of real estate investment will decrease, its pressure on economic growth may end up being less than the market expects.

In terms of internal development, the Chinese economy is expected to hold the growth bottom line in external shock. Economic restructuring and upgrading will continue to progress. The dual-mainline of “big consumption & new economy” will be pushed to highlight the comparative advantage in the midst of trade conflicts, which will attract foreign capital to gradually return to the Chinese market.

In the first of this year, China’s economic trend fluctuated under external factors, which further highlighted the dependence of internal growth for the second half of the year. From a static standpoint, consumption, manufacturing and real estate investment don’t seem to have any shortage of problems. However, in a dynamic point of view, China’s economic endogenous growth does not lack solutions either. The downward pressure on the above three cores will not spiral out of control and will display resilience. In 2018, the total growth rate of total consumer retail sales is expected to reach 8.5% and the rate for fixed asset investment is expected to stay stagnant at 6.3%.

China’s consumption growth was less than expected in the first half of the year. From the beginning, residents’ rate of disposable income has remained stable while the growth rate of consumption spending per capita showed a downward trend with an expansion of the gap between the two.

The aforementioned phenomenon shows that the trend of consumption has not been hindered by external risks but is in the stage of structurally alternating between old and new. The old part is the traditional consumption of high-value goods such as automobiles. The new is the shift from high-end to mid-range consumer goods. The current supply structure and methods have not successfully matched this structural change, resulting in a rapid decline of the old power and the failure to realize the new potential. Consumer spending has passively transformed into a saving act.

The current lack of consumption growth is a structural thing and will improve once the structure collapses. In response to this problem, policy regulation in the second half of 2019 is expected to promote a rise in consumption growth. A new round of infrastructure development is expected to improve consumption of low-tier cities and towns. At the same time, the loss of old power should be avoided with strategies to subsidize large consumer goods, which will drive automobile sales out of the current drought.

Manufacturing investment is expected to stabilize gradually. Tax cuts and fee reductions have been implemented and will truly enter the dividend distribution period, which will stabilize corporate profits.

According to the calculations by China Chief Economist Forum, 51% of the 865.7 billion yuan generated by tax cuts will go to consumers and the remaining 49% will directly benefit the corporate sector. A dividend of 314.5 billion yuan will go to industrial enterprises. This is expected to have a positive impact of 4.7% on the year-on-year growth rate of industrial enterprises’ profits in 2019, slowing the downward trend of corporate profits.

No need for pessimism

There is no need for pessimism in the real-estate sector. The tightening of housing policies in 2018 gave way to high turnover strategies to accelerate the return of funds. The gradual withdrawal of the high-turnover strategy gradually produced downward pressure on the real estate investment market. On paper, it may seem to be a worrying risk but its real effect on economic growth is projected to be lower than market expectations.

In the second half of the year, the biggest uncertainty is still Sino-US trade frictions. Trade talks have resumed since the G20 meeting and the current round of trade negotiations will transition into a long game. The US economy will enter a cycle inflexion point in 2019, meaning the US economy will be unable to bear an extreme escalation of the trade conflicts.

Any extension of the global trade conflicts will exert external pressure on the Chinese economy but the change in global policies has also given China a new space for economic policies internally.

Fiscal policies have replaced monetary policies, becoming the new protagonists of countercyclical regulation. The remaining special debt quotas will be used and other debt types are expected to enter the policy menu to further strengthen the role of infrastructure in the economy. The social safety net is expected to improve in the second half of the year as well.

Due to the high probability of the US Federal Reserve cutting interest rates in the second half, China will follow suit as well. The People’s Bank of China is expected to lower interest rates of OMO and MLF in a timely manner but the possibility of lowering the benchmark interest rate for deposits and loans remains small. The current dual goals of “steady growth” and “promoting reform” will be taken into account. RRR will be reduced depending on the situation as well. As a result of these policies, the M2 growth rate and other indicators are expected to moderately rebound in the remaining six months.

At a time when global recovery is weak, the comparative advantage of China’s economic growth is expected to be highlighted further. The continued expansion of financial openness international capital will gradually return to the Chinese market in the form of first-receiving assets and post-equity assets in the second half of 2019.

This article was first written by Cheng Shi and Qian Zhijun from the China Chief Economist Forum before being published on and translated by Kamaran Malik.

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